================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 000-22433
Brigham Exploration Company
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1311 75-2692967
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6300 BRIDGEPOINT PARKWAY
BUILDING TWO, SUITE 500
AUSTIN, TEXAS 78730
(512) 427-3300
(Address, including zip code, and telephone number,
including area code, of Registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
As of August 11, 2000, 16,712,908 shares of Common Stock, $.01 per share,
were outstanding.
================================================================================
<PAGE>
BRIGHAM EXPLORATION COMPANY
SECOND QUARTER 2000 FORM 10-Q REPORT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<S> <C>
Condensed Consolidated Financial Statements of Brigham Exploration Company
Balance Sheets - December 31, 1999 and June 30, 2000 ..........................................1
Statements of Operations - Three and six months ended June 30, 1999 and 2000 ..................2
Statements of Cash Flows - Six months ended June 30, 1999 and 2000 ............................3
Statement of Changes in Stockholders' Equity - Six months ended June 30, 2000 .................4
Notes to Condensed Consolidated Financial Statements ..........................................5
Condensed Financial Statements of Certain Brigham Exploration Company Subsidiaries
Balance Sheets - June 30, 2000.................................................................9
Balance Sheets - December 31, 1999............................................................10
Statements of Operations - Three months ended June 30, 2000...................................11
Statements of Operations - Three months ended June 30, 1999...................................12
Statements of Operations - Six months ended June 30, 2000.....................................13
Statements of Operations - Six months ended June 30, 1999.....................................14
Statements of Cash Flows - Six months ended June 30, 2000.....................................15
Statements of Cash Flows - Six months ended June 30, 1999.....................................16
Statements of Changes in Equity - Six months ended June 30, 2000..............................17
Notes to Condensed Financial Statements.......................................................18
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................................................................21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................................................31
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K...................................................................32
SIGNATURES..................................................................................................33
</TABLE>
<PAGE>
PART I . FINANCIAL INFORMATION
Item 1. Financial Statements
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1999 2000
---------------- ----------------
(unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 2,742 $ 73
Accounts receivable 4,945 6,808
Other current assets 577 427
---------------- ----------------
Total current assets 8,264 7,308
---------------- ----------------
Natural gas and oil properties, at cost, net 112,066 120,320
Other property and equipment, at cost, net 1,686 1,487
Drilling advances paid 23 39
Deferred loan fees 3,481 3,241
Other noncurrent assets 163 263
---------------- ----------------
$ 125,683 $ 132,658
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 14,851 $ 7,035
Accrued drilling costs 541 729
Participant advances received 850 215
Other current liabilities 1,502 2,727
---------------- ----------------
Total current liabilities 17,744 10,706
---------------- ----------------
Notes payable 56,000 65,000
Senior subordinated notes, net 41,341 44,437
Other noncurrent liabilities 1,600 5,523
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value, 10 million shares
authorized, none issued and outstanding - -
Common stock, $.01 par value, 50 million shares authorized,
14,517,786 and 16,712,908 issued and outstanding at
December 31, 1999 and June 30, 2000, respectively 145 167
Additional paid-in capital 64,171 68,721
Unearned stock compensation (290) (342)
Accumulated deficit (55,028) (61,554)
---------------- ----------------
Total stockholders' equity 8,998 6,992
---------------- ----------------
$ 125,683 $ 132,658
================ ================
</TABLE>
Natural gas and oil properties are accounted for using the full cost method.
See accompanying notes to the consolidated financial statements.
1
<PAGE>
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------------------- -------------------------------
1999 2000 1999 2000
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 3,553 $ 4,635 $ 6,744 $ 9,140
Workstation revenue 71 16 161 49
-------------- -------------- -------------- --------------
3,624 4,651 6,905 9,189
-------------- -------------- -------------- --------------
Costs and expenses:
Lease operating 619 502 1,154 961
Production taxes 216 395 385 699
General and administrative 891 708 1,809 1,448
Depletion of natural gas and oil properties 1,514 1,820 2,875 3,584
Depreciation and amortization 139 124 266 247
Amortization of stock compensation 55 24 113 36
-------------- -------------- -------------- --------------
3,434 3,573 6,602 6,975
-------------- -------------- -------------- --------------
Operating income 190 1,078 303 2,214
-------------- -------------- -------------- --------------
Other income (expense):
Interest income 70 19 94 56
Interest expense, net (2,377) (3,031) (4,458) (5,806)
Loss on sale of natural gas and oil properties (12,195) - (12,195) -
Other expense (527) (2,394) (527) (2,990)
-------------- -------------- -------------- --------------
(15,029) (5,406) (17,086) (8,740)
-------------- -------------- -------------- --------------
Net loss before income taxes (14,839) (4,328) (16,783) (6,526)
Income tax expense - - - -
-------------- -------------- -------------- --------------
Net loss $ (14,839) $ (4,328) $ (16,783) $ (6,526)
============== ============== ============== ==============
Net loss per share:
Basic/Diluted $ (1.04) $ (0.26) $ (1.21) $ (0.41)
Weighted average common shares outstanding:
Basic/Diluted 14,309 16,713 13,816 15,996
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
2
<PAGE>
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months
Ended June 30,
----------------------
1999 2000
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (16,783) $ (6,526)
Adjustments to reconcile net loss to cash provided (used) by operating activities:
Depletion of natural gas and oil properties 2,875 3,584
Depreciation and amortization 266 247
Amortization of stock compensation 113 36
Interest paid through issuance of additional senior subordinated notes 2,642 3,003
Amortization of deferred loan fees and debt issuance costs 628 689
Amortization of discount on senior subordinated notes 228 417
Loss on sale of natural gas and oil properties 12,195 -
Amortization of deferred loss on derivatives instruments - 280
Market value adjustment for derivatives instruments 527 2,367
Changes in working capital and other items:
(Increase) decrease in accounts receivable 4,879 (1,863)
(Increase) decrease in prepaid expenses (90) (130)
Increase (decrease) in accounts payable (2,001) (7,816)
Increase (decrease) in participant advances received (305) (635)
Increase (decrease) in other current liabilities (76) 292
Other noncurrent assets (111) (100)
Other noncurrent liabilities (4,655) 2,388
---------- ----------
Net cash provided (used) by operating activities 332 (3,767)
---------- ----------
Cash flows from investing activities:
Additions to natural gas and oil properties (15,280) (11,612)
Proceeds from sale of natural gas and oil properties 26,700 -
Additions to other property and equipment (89) (48)
Increase in drilling advances paid (122) (16)
---------- ----------
Net cash provided (used) by investing activities 11,209 (11,676)
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock - 4,187
Proceeds from issuance of warrants - 260
Increase in notes payable 6,000 9,000
Repayment of notes payable (16,750) (109)
Principal payments on capital lease obligations (130) (114)
Deferred loan fees paid (478) (450)
---------- ----------
Net cash provided (used) by financing activities (11,358) 12,774
---------- ----------
Net increase (decrease) in cash and cash equivalents 183 (2,669)
Cash and cash equivalents, beginning of period 2,569 2,742
---------- ----------
Cash and cash equivalents, end of period $ 2,752 $ 73
========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 2,457 $ 1,646
========== ==========
Supplemental disclosure of noncash investing and financing activities:
Capital lease asset additions $ 51 $ -
========== ==========
Decrease in accounts payable and other noncurrent liabilities in
exchange for issuance of common stock $ 3,510 $ -
========== ==========
Increase in accounts payable for deferred loan fees to be paid in future periods $ 300 $ -
========== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
BRIGHAM EXPLORATION COMPANY
CONDENSED CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Common Stock Additional Deferred
---------------------------- Paid-in Stock Accumulated
Shares Amounts Capital Compensation Deficit Total
-------------- ----------- ------------ ---------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1999 14,517,786 $ 145 $64,171 $ (290) $ (55,028) $ 8,998
Net loss - - - - (6,526) (6,526)
Issuance of common stock 2,195,122 22 4,165 - - 4,187
Issuance of stock options - - 185 (185) - -
Forfeiture of stock options - - (60) 10 - (50)
Issuance of warrants - - 260 - - 260
Amortization of unearned
stock compensation - - - 123 - 123
-------------- ----------- ------------ ---------------- --------------- ----------
Balance, June 30, 2000 16,712,908 $ 167 $68,721 $ (342) $ (61,554) $ 6,992
============== =========== ============ ================ =============== ==========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
4
<PAGE>
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
Brigham Exploration Company (the "Company") is a Delaware corporation
formed on February 25, 1997 for the purpose of exchanging its common stock
for the common stock of Brigham, Inc. and the partnership interests of
Brigham Oil & Gas, L.P. The Company explores and develops onshore domestic
natural gas and oil properties using 3-D seismic imaging and other advanced
technologies. The Company focuses its exploration and development of
onshore natural gas and oil properties primarily in the Anadarko Basin, the
Texas Gulf Coast and West Texas.
2. BASIS OF PRESENTATION
The accompanying financial statements include the accounts of the Company
and its wholly-owned subsidiaries, and its proportionate share of assets,
liabilities and income and expenses of the limited partnerships in which
the Company, or any of its subsidiaries, has a participating interest. All
significant intercompany accounts and transactions have been eliminated.
The accompanying condensed consolidated financial statements are unaudited,
and in the opinion of management, reflect all adjustments that are
necessary for a fair presentation of the financial position and results of
operations for the periods presented. All such adjustments are of a normal
and recurring nature. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the entire
year. The unaudited condensed consolidated financial statements should be
read in conjunction with the Company's 1999 Annual Report on Form 10-K
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
3. AMENDMENT TO REVOLVING CREDIT FACILITY AND SENIOR SUBORDINATED NOTES
In February 2000, the Company entered into an amended and restated Credit
Facility with its existing lenders and a new lender. This amended and
restated Credit Facility provides the Company with $70 million in borrowing
availability for a three-year term. If the Company exceeds certain asset
value and interest coverage tests in the third quarter of 2000, the total
borrowing availability under the Credit Facility will increase to $75
million. The Company expects to meet these tests. The Credit Facility
includes a provision whereby certain amounts held by one of the lenders,
not to exceed $30 million of the outstanding borrowings, are convertible
into shares of the Company's common stock ("Convertible Notes") to the
extent total borrowings exceed $45 million. As of June 30 and August 11,
2000, the Convertible Notes approximate $20 million and $25 million,
respectively.
The Credit Facility provides that the Convertible Notes will be convertible
as follows: (i) the first $10 million of borrowings is convertible at $3.90
per share, (ii) the second $10 million is convertible at $6.00 per share,
and (iii) the final $10 million is convertible at $8.00 per share. The
Convertible Notes could result in a beneficial conversion feature based on
the relationship between the Company's stock price at the time of a
borrowing and the strike price of the relative portion of the convertible
debt. The value assigned to the beneficial conversion feature would be
recorded as a component of interest expense to the extent the Convertible
Notes are immediately convertible. Due to the fact that the strike prices
of the Convertible Notes at February 17, 2000 and at each subsequent draw
date were in excess of the market prices of the Company's common stock at
those respective dates, no beneficial conversion feature was recorded. If
the Credit Facility is repaid at maturity or is prepaid prior to maturity
without payments of cash premiums, the warrants issued to the new
participant in the Credit Facility to purchase Brigham common stock become
exercisable. Further, to the extent the Company prepays any of the
Convertible Notes, it will be required to pay a premium above the face
value of the Convertible Notes to the lender. Such premium amounts range
from 150% to 110%, depending on the timing of the prepayment. Such
prepayment, however, would require the prior approval of the original
lenders to the Credit Facility. In addition, certain financial covenants of
the Credit Facility were amended or added. In
5
<PAGE>
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
connection with this most recent amendment, the Company reset the price of
the warrants previously issued to its existing senior lenders to purchase
one million shares of the Company's common stock from an exercise price of
$2.25 per share to $2.02 per share.
In February 2000, the indenture governing the Subordinated Notes was
amended. In this amendment, the holders of the Subordinated Notes waived
the minimum consolidated interest coverage ratio covenant through June 30,
2000, and adjusted subsequent levels under this test. In addition, the
amendment provides the Company with an extension of its right to pay
interest through the issuance of additional Subordinated Notes in lieu of
cash (or "in kind") through the third quarter of 2000 and potentially
through the fourth quarter of 2000 if certain conditions are met. In
exchange for granting these amendments, the Company (i) reset the price of
the warrants previously issued to the holders of the Subordinated Notes to
purchase one million shares of the Company's common stock from an exercise
price of $3.50 per share to $2.43 per share, and (ii) granted to the
holders of the Subordinated Notes a term overriding royalty interest that
provides for the limited right to receive 4%, or 3% if certain conditions
are met, of the Company's net production revenue to reduce any outstanding
Subordinated Notes issued as interest paid in kind. As payments are made
pursuant to the term overriding royalty interest, they will be recorded by
the Company as a reduction of the balance payable pursuant to the
Subordinated Notes.
The modification of these agreements did not result in any material
adjustment to debt issuance costs.
4. NET INCOME (LOSS) PER SHARE
Net loss per share is presented in the consolidated financial statements
based on a basic loss per share calculation as well as a diluted loss per
share calculation. Basic loss per share is computed by dividing net loss
applicable to common shareholders by the weighted average number of common
shares outstanding during each period. Diluted loss per share is computed
by dividing net loss applicable to common shareholders by the weighted
average number of common shares and common share equivalents outstanding
(if dilutive) during each period. The number of common share equivalents
outstanding is computed using the treasury stock method.
At June 30, 2000 and December 31, 1999, options and warrants to purchase
8,767,624 and 3,519,726 shares of common stock, respectively, were
outstanding but were not included in the computation of diluted loss per
share because they were anti-dilutive.
5. ISSUANCE OF COMMON STOCK
In February 2000, the Company issued 2,195,122 shares of common stock and
731,707 warrants to purchase the Company's common stock for total net
proceeds of $4.2 million in a private placement to a group of institutional
investors led by affiliates of two members of the Company's board of
directors. The equity sale consisted of units that included one share of
common stock and one-third of a warrant to purchase the Company's common
stock at an exercise price of $2.5625 per share.
6. HEDGING ACTIVITIES
The Company utilizes various commodity swap and option contracts to (i)
reduce the effects of volatility in price changes on the oil and natural
gas commodities it produces and sells, (ii) support its capital budgeting
plans, and (iii) lock-in prices to protect the economics related to certain
capital projects.
In the first six months of 2000 the Company recognized losses of $2.3
million ($0.72 per Mcfe) from hedging contracts as a component of oil and
gas sales. Derivative instruments that do not qualify as hedging contracts
are recorded at fair market value and recorded on the balance sheet as
deferred gain or loss. Each balance sheet
6
<PAGE>
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
date the market value of these derivative instruments is adjusted to
current value and any deferred gains or losses are recognized as a
component of other income or expense. In the first six months of 2000 the
Company recognized other losses of $3.0 million related to derivative
instruments not qualifying as hedging contracts, including $2.4 million in
non-cash losses related to the changes in fair market values of certain
hedging contracts.
The following tables summarize the Company's outstanding natural gas and
oil hedging arrangements as of July 1, 2000:
<TABLE>
<CAPTION>
NATURAL GAS HEDGES 2000 2001 2002
------------------- --------------------- -----------------------
Average Average Average
Volumes Contract Volumes Contract Volumes Contract
Monthly Hedged Price Hedged Price Hedged Price
Pricing Basis Contract Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu)
------------- ------------- ------- --------- ------- --------- ------- ---------
Fixed Price Swaps:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- --
Oklahoma April 2001
Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- --
Ship Channel April 2001
Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- --
South Texas April 2001
Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326
Oklahoma June 2002
Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- --
Oklahoma December 2001
<CAPTION>
CRUDE OIL HEDGES 2000 2001 2002
-------------------- -------------------- ------------------
Average Average Average
Volumes Contract Volumes Contract Volumes Contract
Monthly Hedged Price Hedged Price Hedged Price
Pricing Basis Contract Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl)
------------- ------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- --
December 2001
Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- --
December 2001
</TABLE>
7. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement, as
amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133"
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires enterprises to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The requisite accounting for
changes in the fair value of a derivative will depend on the intended use
of the derivative and the resulting designation. The Company must adopt
SFAS No. 133 and No. 138, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB
7
<PAGE>
BRIGHAM EXPLORATION COMPANY
NOTES TO THE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Statement No. 133", effective January 1, 2001. The Company is currently
assessing the impact adoption of this standard will have on its financial
statement presentation.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. FIN
44 clarifies the application of opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company
believes that the impact of FIN 44 will not have a material effect on its
financial position or results of operations.
8
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED BALANCE SHEETS
AS OF JUNE 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 67 $ 73 $ 1 $ 1
Accounts receivable 6,808 6,808 - -
Other current assets 427 427 - -
------------- ------------- ------------ -------------
Total current assets 7,302 7,308 1 1
------------- ------------- ------------ -------------
Natural gas and oil properties, at cost, net 120,320 120,320 - -
Other property and equipment, at cost, net 1,487 1,487 - -
Investment in subsidiaries
and intercompany advances 141 27 305 50,296
Drilling advances paid 39 39 - -
Deferred loan fees 1,979 1,979 - -
Other noncurrent assets 263 263 - -
------------- ------------- ------------ -------------
$ 131,531 $ 131,423 $ 306 $ 50,297
============= ============= ============ =============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 7,035 $ 7,035 $ - $ -
Accrued drilling costs 729 729 - -
Participant advances received 215 215 - -
Other current liabilities 2,400 2,400 - -
------------- ------------- ------------ -------------
Total current liabilities 10,379 10,379 - -
------------- ------------- ------------ -------------
Notes payable 65,000 65,000 - -
Other noncurrent liabilities 5,523 5,523 - -
Intercompany accounts payable 2,007 1,923 - 2,034
Intercompany notes payable 48,138 48,138 - 48,138
Commitments and contingencies
Minority interest - 332 - -
Equity
Partners' capital 484 - 306 125
Common stock, $1.00 par value, 1,000
shares authorized, issued and
outstanding - 1 - -
Additional paid-in capital - 19,233 - -
Accumulated deficit - (19,106) - -
------------- ------------- ------------ -------------
Total equity 484 128 306 125
------------- ------------- ------------ -------------
$ 131,531 $ 131,423 $ 306 $ 50,297
============= ============= ============ =============
</TABLE>
Natural gas and oil properties are accounted for using the full cost method.
See accompanying notes to the condensed financial statements.
9
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC I, LLC II, LLC
ASSETS
Current assets:
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 2,718 $ 2,736 $ 6 $ 6
Accounts receivable 4,945 4,945 - -
Other current assets 577 577 - -
------------- ------------- ------------ -------------
Total current assets 8,240 8,258 6 6
------------- ------------- ------------ -------------
Natural gas and oil properties, at cost, net 112,066 112,066 - -
Other property and equipment, at cost, net 1,686 1,686 - -
Investment in subsidiaries
and intercompany advances 130 26 1,299 47,802
Drilling advances paid 23 23 - -
Deferred loan fees 2,108 2,108 - -
Other noncurrent assets 164 164 - -
------------- ------------- ------------ -------------
$ 124,417 $ 124,331 $ 1,305 $ 47,808
============= ============= ============ =============
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable $ 14,851 $ 14,851 $ - $ -
Accrued drilling costs 541 541 - -
Participant advances received 850 850 - -
Other current liabilities 1,429 1,429 - -
------------- ------------- ------------ -------------
Total current liabilities 17,671 17,671 - -
------------- ------------- ------------ -------------
Notes payable 56,000 56,000 - -
Other noncurrent liabilities 1,600 1,600 - -
Intercompany accounts payable 1,752 1,687 - 1,779
Intercompany notes payable 45,459 45,459 - 45,459
Commitments and contingencies
Minority interest - 1,325 - -
Equity
Partners' capital 1,935 - 1,305 570
Common stock, $1.00 par value, 1,000
shares authorized, issued and
outstanding - 1 - -
Additional paid-in capital - 17,832 - -
Accumulated deficit - (17,244) - -
------------- ------------- ------------ -------------
Total equity 1,935 589 1,305 570
------------- ------------- ------------ -------------
$ 124,417 $ 124,331 $ 1,305 $ 47,808
============= ============= ============ =============
</TABLE>
Natural gas and oil properties are accounted for using the full cost method.
See accompanying notes to the condensed financial statements.
10
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 4,635 $ 4,635 $ - $ -
Workstation revenue 16 16 - -
------------- --------------- ------------- ---------------
4,651 4,651 - -
------------- --------------- ------------- ---------------
Costs and expenses:
Lease operating 502 502 - -
Production taxes 395 395 - -
General and administrative 704 706 3 2
Depletion of natural gas and oil properties 1,820 1,820 - -
Depreciation and amortization 124 124 - -
Amortization of stock compensation 24 24 - -
------------- --------------- ------------- ---------------
3,569 3,571 3 2
------------- --------------- ------------- ---------------
Operating income (loss) 1,082 1,080 (3) (2)
------------- --------------- ------------- ---------------
Other income (expense):
Interest income 19 19 - -
Interest expense, net (1,145) (1,145) - -
Interest expense - intercompany (1,545) (1,545) - (1,545)
Other expense (2,394) (2,394) - -
------------- --------------- ------------- ---------------
(5,065) (5,065) - (1,545)
------------- --------------- ------------- ---------------
Minority interest in net loss - (2,728) - -
------------- --------------- ------------- ---------------
Net loss before income taxes (3,983) (1,257) (3) (1,547)
Income tax benefit - - - -
Equity in net income (loss) of investee - - (2,728) 330
------------- --------------- ------------- ---------------
Net loss $ (3,983) $ (1,257) $ (2,731) $ (1,217)
============= =============== ============= ===============
</TABLE>
See accompanying notes to the condensed financial statements.
11
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 3,553 $ 3,553 $ - $ -
Workstation revenue 71 71 - -
------------- --------------- ------------- ---------------
3,624 3,624 - -
------------- --------------- ------------- ---------------
Costs and expenses:
Lease operating 619 619 - -
Production taxes 216 216 - -
General and administrative 881 886 5 5
Depletion of natural gas and oil properties 1,514 1,514 - -
Depreciation and amortization 139 139 - -
Amortization of stock compensation 55 55 - -
------------- --------------- ------------- ---------------
3,424 3,429 5 5
------------- --------------- ------------- ---------------
Operating income (loss) 200 195 (5) (5)
------------- --------------- ------------- ---------------
Other income (expense):
Interest income 70 70 - -
Interest expense, net (1,563) (786) - -
Interest expense - intercompany (584) (1,361) - (1,361)
Loss on sale of natural gas and oil properties (12,195) (12,195) - -
Other expense (527) (527) - -
------------- --------------- ------------- ---------------
(14,799) (14,799) - (1,361)
------------- --------------- ------------- ---------------
Minority interest in net loss - (10,000) - -
------------- --------------- ------------- ---------------
Net loss before income taxes (14,599) (4,604) (5) (1,366)
Income tax benefit - - - -
Equity in net income (loss) of investee - - (10,000) (3,091)
------------- --------------- ------------- ---------------
Net loss $ (14,599) $ (4,604) $ (10,005) $ (4,457)
============= =============== ============= ===============
</TABLE>
See accompanying notes to the condensed financial statements.
12
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Revenues:
Natural gas and oil sales $ 9,140 $ 9,140 $ - $ -
Workstation revenue 49 49 - -
------------- ------------- ------------- ------------
9,189 9,189 - -
------------- ------------- ------------- ------------
Costs and expenses:
Lease operating 961 961 - -
Production taxes 699 699 - -
General and administrative 1,439 1,443 5 4
Depletion of natural gas and oil properties 3,584 3,584 - -
Depreciation and amortization 247 247 - -
Amortization of stock compensation 36 36 - -
------------- ------------- ------------- ------------
6,966 6,970 5 4
------------- ------------- ------------- ------------
Operating income (loss) 2,223 2,219 (5) (4)
------------- ------------- ------------- ------------
Other income (expense):
Interest income 56 56 - -
Interest expense, net (2,145) (2,145) - -
Interest expense - intercompany (3,042) (3,042) - (3,042)
Other expense (2,990) (2,990) - -
------------- ------------- ------------- ------------
(8,121) (8,121) - (3,042)
------------- ------------- ------------- ------------
Minority interest in net loss - (4,040) - -
------------- ------------- ------------- ------------
Net loss before income taxes (5,898) (1,862) (5) (3,046)
Income tax benefit - - - -
Equity in net income (loss) of investee - - (4,040) 1,243
------------- ------------- ------------- ------------
Net loss $ (5,898) $ (1,862) $ (4,045) $ (1,803)
============= ============= ============= ============
</TABLE>
See accompanying notes to the condensed financial statements.
13
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
Revenues:
<S> <C> <C> <C> <C>
Natural gas and oil sales $ 6,744 $ 6,744 $ - $ -
Workstation revenue 161 161 - -
------------- ------------- ------------- ------------
6,905 6,905 - -
------------- ------------- ------------- ------------
Costs and expenses:
Lease operating 1,154 1,154 - -
Production taxes 385 385 - -
General and administrative 1,799 1,804 5 5
Depletion of natural gas and oil properties 2,875 2,875 - -
Depreciation and amortization 266 266 - -
Amortization of stock compensation 113 113 - -
------------- ------------- ------------- ------------
6,592 6,597 5 5
------------- ------------- ------------- ------------
Operating income 313 308 (5) (5)
------------- ------------- ------------- ------------
Other income (expense):
Interest income 94 94 - -
Interest expense, net (2,878) (2,101) - -
Interest expense - intercompany (1,165) (1,942) - (2,678)
Loss on sale of natural gas and oil properties (12,195) (12,195) - -
Other expense (527) (527) - -
------------- ------------- ------------- ------------
(16,671) (16,671) - (2,678)
------------- ------------- ------------- ------------
Minority interest in net loss - (11,205) - -
------------- ------------- ------------- ------------
Net loss before income taxes (16,358) (5,158) (5) (2,683)
Income tax benefit - - - -
Equity in net income (loss) of investee - - (11,205) (2,311)
------------- ------------- ------------- ------------
Net loss $ (16,358) $ (5,158) $ (11,210) $ (4,994)
============= ============= ============= ============
</TABLE>
See accompanying notes to the condensed financial statements.
14
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2000
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(5,898) $(1,862) $(4,045) $(1,803)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depletion of natural gas and oil properties 3,584 3,584 - -
Depreciation and amortization 247 247 - -
Amortization of stock compensation 36 36 - -
Amortization of deferred loan fees and debt issuance costs 488 488 - -
Amortization of deferred loss on derivatives instruments 280 280 - -
Market value adjustment for derivatives instruments 2,367 2,367 - -
Minority interest in net loss - (4,040) - -
Equity in net (income) loss of investee - - 4,040 (1,243)
Changes in working capital and other items:
(Increase) decrease in accounts receivable (1,863) (1,863) - -
(Increase) decrease in prepaid expenses (130) (130) - -
Increase (decrease) in accounts payable (7,816) (7,816) - -
Increase (decrease) in participant advances received (635) (635) - -
Increase (decrease) in other current liabilities 77 77 - -
Increase (decrease) in intercompany accounts payable 107 88 - 38
Other noncurrent assets (100) (100) - -
Other noncurrent liabilities 2,388 2,388 - -
------------ ------------ ----------- ------------
Net cash provided (used) by operating activities (6,868) (6,891) (5) (3,008)
------------ ------------ ----------- ------------
Cash flows from investing activities:
Additions to natural gas and oil properties (11,612) (11,612) - -
Additions to other property and equipment (48) (48) - -
Investment in subsidiaries and intercompany advances 4,454 4,465 - -
Increase in drilling advances paid (16) (16) - -
------------ ------------ ----------- ------------
Net cash provided (used) by investing activities (7,222) (7,211) - -
------------ ------------ ----------- ------------
Cash flows from financing activities:
Increase in notes payable 9,000 9,000 - -
Increase in intercompany notes payable 3,003 3,003 - 3,003
Principal payments on capital lease obligations (114) (114) - -
Deferred loan fees paid (450) (450) - -
------------ ------------ ----------- ------------
Net cash provided (used) by financing activities 11,439 11,439 - 3,003
------------ ------------ ----------- ------------
Net decrease in cash and cash equivalents (2,651) (2,663) (5) (5)
Cash and cash equivalents, beginning of year 2,718 2,736 6 6
------------ ------------ ----------- ------------
Cash and cash equivalents, end of period $ 67 $ 73 $ 1 $ 1
============ ============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 1,646 $ 1,646 $ - $ -
Supplemental disclosure of cash flow information:
Intercompany capital contributions $ - $ 1,406 $ 3,058 $ 1,364
</TABLE>
See accompanying notes to the condensed financial statements.
15
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
BRIGHAM BRIGHAM BRIGHAM
OIL & BRIGHAM, HOLDINGS HOLDINGS
GAS, L.P. INC. I, LLC II, LLC
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (16,358) $ (5,158) $ (11,210) $ (4,994)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depletion of natural gas and oil properties 2,875 2,875 - -
Depreciation and amortization 266 266 - -
Amortization of stock compensation 113 113 - -
Amortization of deferred loan fees and debt issuance costs 440 440 - -
Loss on sale of natural gas and oil properties 12,195 12,195
Market value adjustment for derivative instruments 527 527
Minority interest in net loss - (11,205) - -
Equity in net (income) loss of investee - - 11,205 2,311
Changes in working capital and other items:
(Increase) decrease in accounts receivable 4,879 4,879 - -
(Increase) decrease in prepaid expenses (90) (90) - -
Increase (decrease) in accounts payable (2,001) (2,001) - -
Increase (decrease) in participant advances received (305) (305) - -
Increase (decrease) in other current liabilities (111) (111) - -
Increase (decrease) in intercompany accounts payable 29 125 - 35
Other noncurrent assets (109) (109) - -
Other noncurrent liabilities (4,655) (4,655) - -
------------ ------------ ----------- ------------
Net cash provided (used) by operating activities (2,305) (2,214) (5) (2,648)
------------ ------------ ----------- ------------
Cash flows from investing activities:
Additions to natural gas and oil properties (15,280) (15,280) - -
Proceeds from sale of natural gas and oil properties 26,700 26,700 - -
Additions to other property and equipment (89) (89) - -
Change in investment insubsidiaries and intercompany advances (4) (95) 5 6
Increase in drilling advances paid (122) (122) - -
------------ ------------ ----------- ------------
Net cash provided (used) by investing activities 11,205 11,114 5 6
------------ ------------ ----------- ------------
Cash flows from financing activities:
Increase in notes payable 6,000 6,000 - -
Repayment of notes payable (16,750) (16,750) - -
Increase in intercompany notes payable 2,642 2,642 - 2,642
Principal payments on capital lease obligations (130) (130) - -
Deferred loan fees paid (478) (478) - -
------------ ------------ ----------- ------------
Net cash provided (used) by financing activities (8,716) (8,716) - 2,642
------------ ------------ ----------- ------------
Net increase in cash and cash equivalents 184 184 - -
Cash and cash equivalents, beginning of year 2,549 2,563 5 6
------------ ------------ ----------- ------------
Cash and cash equivalents, end of year $ 2,733 $ 2,747 $ 5 $ 6
============ ============ =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for interest $ 2,897 $ 2,897 $ - $ -
Supplemental disclosure of noncash investing and financing activities:
Capital lease asset additions $ 51 $ 51 $ - $ -
Increase in accounts payable for deferred loan fees to be
paid in future periods $ 300 $ 300 $ - $ -
Capital contributions received in exchange for accounts
payable and other noncurrent liabilities $ 3,510 $ - $ - $ -
Intercompany capital contributions $ - $ 1,106 $ 2,404 $ 1,071
</TABLE>
See accompanying notes to the condensed financial statements.
16
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
CONDENSED STATEMENTS OF CHANGES IN EQUITY
(in thousands, except shares)
(unaudited)
<TABLE>
<CAPTION>
Retained
Additional Earnings/
Common Stock Paid-In Accumulated Partners'
-----------------------
Shares Amounts Capital Deficit Capital Total
--------- ------------ ------------ ------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BRIGHAM OIL & GAS, L.P.
Balance,
December 31, 1999 $ - $ - $ - $ - $ 1,935 $ 1,935
Capital contribution - - - - 14,907 14,907
Net loss - - - - (16,358) (16,358)
--------- ------------ ------------ ------------- ---------- ----------
Balance,
June 30, 2000 - $ - $ - $ - $ 484 $ 484
========= ============ ============ ============= ========== ==========
BRIGHAM INC.
Balance,
December 31, 1999 1,000 $ 1 $ 17,832 $ (17,244) $ - $ 589
Capital contribution - - 4,697 - - 4,697
Net loss - - - (5,158) - (5,158)
--------- ------------ ------------ ------------- ---------- ----------
Balance,
June 30, 2000 1,000 $ 1 $ 22,529 $ (22,402) $ - $ 128
========= ============ ============ ============= ========== ==========
BRIGHAM HOLDING I, LLC
Balance,
December 31, 1999 - $ - $ - $ - $ 1,305 $ 1,305
Capital contribution - - - - 10,211 10,211
Net loss - - - - (11,210) (11,210)
--------- ------------ ------------ ------------- ---------- ----------
Balance,
June 30, 2000 - $ - $ - $ - $ 306 $ 306
========= ============ ============ ============= ========== ==========
BRIGHAM HOLDINGS II, LLC
Balance,
December 31, 1999 - $ - $ - $ - $ 570 $ 570
Capital contribution - - - - 4,549 4,549
Net loss - - - - (4,994) (4,994)
--------- ------------ ------------ ------------- ---------- ----------
Balance,
June 30, 2000 - $ - $ - $ - $ 125 $ 125
========= ============ ============ ============= ========== ==========
</TABLE>
See accompanying notes to the condensed financial statements.
17
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(unaudited)
1. ORGANIZATION AND BACKGROUND
In August 1998, upon the filing of a registration statement with the SEC,
Brigham Exploration Company, a Delaware corporation, (the "Company") issued
$50 million of debt and equity securities to two affiliated institutional
investors. The financing transaction consisted of the issuance of $40
million of senior subordinated secured notes (the "Notes"). The Notes are
fully and unconditionally guaranteed, on a joint and several basis, by each
of the Company's directly or indirectly wholly-owned subsidiaries which are
Brigham Oil & Gas, L.P. (the "Partnership"), Brigham Inc., Brigham Holdings
I LLC ("Holdings I"), and Brigham Holdings II LLC ("Holdings II").
Furthermore, these subsidiaries have pledged their respective stock and
partnership interests as collateral for the Notes. These financial
statements include the financial statements for the wholly owned
subsidiaries whose securities and partnership interests comprise
substantially all of the collateral pledged for the Notes.
The Partnership explores and develops onshore domestic natural gas and oil
properties using 3-D seismic imaging and other advanced technologies. The
Company focuses its exploration and development of onshore natural gas and
oil properties primarily in the Anadarko Basin, the Texas Gulf Coast and
West Texas. Brigham, Inc. is a Nevada corporation whose only asset prior to
the Exchange was it's less than 1% ownership interest in the Partnership.
Brigham, Inc. is the managing general partner of the Partnership.
The Company is a Delaware corporation formed on February 25, 1997 for the
purpose of exchanging its common stock for the common stock of Brigham,
Inc. and the partnership interests of Brigham Oil & Gas, L.P. Subsequent to
this exchange, the Company owned a 68.5% interest in the Partnership and
Brigham, Inc. owned a 31.50% interest in the Partnership. Effective January
1, 1998, Brigham, Inc. contributed 30.5% of its 31.5% interest in the
Partnership to Holdings II, a newly formed Nevada LLC and wholly owned
subsidiary of Brigham, Inc., whose only asset is its investment in the
Partnership. Also effective January 1, 1998 the Company contributed its
68.5% interest in the Partnership to Brigham Holdings I, a newly formed
Nevada LLC and wholly owned subsidiary of the Company whose only asset is
its investment in the Partnership.
2. BASIS OF PRESENTATION
The accompanying financial condensed financial statements are unaudited,
and in the opinion of management, reflect all adjustments that are
necessary for a fair presentation of the financial position and results of
operations for the periods presented. All such adjustments are of a normal
and recurring nature. The results of operations for the periods presented
are not necessarily indicative of the results to be expected for the entire
year. The unaudited condensed financial statements should be read in
conjunction with the Company's 1999 Annual Report on Form 10-K pursuant to
Section 13 or 15(d) of the Securities and Exchange Act of 1934.
3. AMENDMENT TO REVOLVING CREDIT FACILITY
In February 2000, the Partnership entered into an amended and restated
Credit Facility with its existing lenders and a new lender. This amended
and restated Credit Facility provides the Partnership with $70 million in
borrowing availability for a three-year term. If the Company exceeds
certain asset value and interest coverage tests in the third quarter of
2000, the total borrowing availability under the Credit Facility will
increase to $75 million. The Company expects to meet these tests. The
Credit Facility includes a provision whereby certain amounts held by one of
the lenders, not to exceed $30 million of the outstanding borrowings, are
convertible into shares of the Company's common stock ("Convertible Notes")
to the extent total borrowings exceed $45
18
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(unaudited)
million. As of June 30 and August 11, 2000, the Convertible Notes
approximate $20 million and $25 million, respectively.
The Credit Facility provides that the Convertible Notes will be convertible
as follows: (i) the first $10 million of borrowings is convertible at $3.90
per share, (ii) the second $10 million is convertible at $6.00 per share,
and (iii) the final $10 million is convertible at $8.00 per share. The
Convertible Notes could result in a beneficial conversion feature based on
the relationship between the Company's stock price at the time of a
borrowing and the strike price of the relative portion of the convertible
debt. The value assigned to the beneficial conversion feature would be
recorded as a component of interest expense to the extent the Convertible
Notes are immediately convertible. Due to the fact that the strike prices
of the Convertible Notes at February 17, 2000 and at each subsequent draw
date were in excess of the market prices of the Company's common stock at
those respective dates, no beneficial conversion feature was recorded. If
the Credit Facility is repaid at maturity or is prepaid prior to maturity
without payments of cash premiums, the warrants issued to the new
participant in the Credit Facility to purchase Brigham common stock become
exercisable. Further, to the extent the Partnership prepays any of the
Convertible Notes, it will be required to pay a premium above the face
value of the Convertible Notes to the lender. Such premium amounts range
from 150% to 110%, depending on the timing of the prepayment. Such
prepayment, however, would require the prior approval of the original
lenders to the Credit Facility. In addition, certain financial covenants of
the Credit Facility were amended or added. In connection with this most
recent amendment, the Partnership reset the price of the warrants
previously issued to its existing senior lenders to purchase one million
shares of the Company's common stock from an exercise price of $2.25 per
share to $2.02 per share.
The modification of this agreement did not result in any material
adjustment to debt issuance costs.
4. HEDGING ACTIVITIES
The Company utilizes various commodity swap and option contracts to (i)
reduce the effects of volatility in price changes on the oil and natural
gas commodities it produces and sells, (ii) support its capital budgeting
plans, and (iii) lock-in prices to protect the economics related to certain
capital projects.
In the first six months of 2000 the Company recognized losses of $2.3
million ($0.72 per Mcfe) from hedging contracts as a component of oil and
gas sales. Derivative instruments that do not qualify as hedging contracts
are recorded at fair market value and recorded on the balance sheet as
deferred gain or loss. Each balance sheet date the market value of these
derivative instruments is adjusted to current and any deferred gains or
losses are recognized as a component of other income or expense. In the
first six months of 2000 the Company recognized other losses of $3.0
million related to derivative instruments not qualifying as hedging
contracts, including $2.4 million in non-cash losses related to the changes
in fair market values of certain hedging contracts.
19
<PAGE>
BRIGHAM EXPLORATION COMPANY SUBSIDIARIES
NOTES TO THE CONDENSED FINANCIAL STATEMENTS
(unaudited)
The following tables summarize the Company's outstanding natural gas and
oil hedging arrangements as of July 1, 2000:
<TABLE>
<CAPTION>
NATURAL GAS HEDGES 2000 2001 2002
------------------- ------------------ ------------------
Average Average Average
Volumes Contract Volumes Contract Volumes Contract
Monthly Hedged Price Hedged Price Hedged Price
Pricing Basis Contract Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu)
------------- ------------- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Swaps:
Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- --
Oklahoma April 2001
Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- --
Ship Channel April 2001
Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- --
South Texas April 2001
Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326
Oklahoma June 2002
Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- --
Oklahoma December 2001
<CAPTION>
CRUDE OIL HEDGES 2000 2001 2002
-------------------- -------------------- --------------------
Average Average Average
Volumes Contract Volumes Contract Volumes Contract
Monthly Hedged Price Hedged Price Hedged Price
Pricing Basis Contract Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl)
------------- ------------- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- --
December 2001
Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- --
December 2001
</TABLE>
5. RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement, as
amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133"
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires enterprises to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The requisite accounting for
changes in the fair value of a derivative will depend on the intended use
of the derivative and the resulting designation. The Company must adopt
SFAS No. 133 and No. 138, as amended by SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective
Date of FASB Statement No. 133", effective January 1, 2001. The Company is
currently assessing the impact adoption of this standard will have on its
financial statement presentation.
20
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
NATURAL GAS AND OIL SALES. Natural gas and oil sales increased 30% from
$3.6 million in the second quarter of 1999 to $4.6 million in the second
quarter of 2000. Of this net increase, $1.0 million was attributable to a
28% increase in the average realized equivalent oil and natural gas sales
price and $78,000 was attributable to a 2% increase in net equivalent
production volumes. Net natural gas production volumes increased 4% from
1,005 MMcf in the second quarter of 1999 to 1,047 MMcf in the second
quarter of 2000. Net natural gas volumes for the second quarter of 1999
included approximately 213 MMcf attributable to properties sold by Brigham
in June 1999. Excluding production attributable to these divested
properties, net natural gas volumes increased 32% in the second quarter of
2000, compared to adjusted volumes produced during the same period in 1999.
This increase was principally due to the completion of wells drilled over
the past twelve months and recompletion and workover projects performed on
certain producing wells. The average price received for natural gas
decreased 5% from $2.07 per Mcf in the second quarter of 1999 to $1.98 per
Mcf in the second quarter of 2000. Included in these realized prices were
natural gas hedging gains of $7,000 ($0.01 per Mcf) in the second quarter
of 1999, and natural gas hedging losses of $1.7 million ($1.66 per Mcf) in
the second quarter of 2000. Net oil production volumes decreased 1% from 90
MBbls in the second quarter of 1999 to 89 MBbls in the second quarter of
2000. Excluding 11 MBbls of net oil production attributable to properties
divested in June 1999, net oil volumes increased 12% in the second quarter
of 2000 as compared to the adjusted volumes produced during the same period
in 1999. This increase was principally due to the completion of wells
drilled over the past twelve months and recompletion and workover projects
performed on certain producing wells. The average price received for oil
increased 77% from $16.24 per Bbl in the second quarter of 1999 to $28.71
per Bbl in the second quarter of 2000.
WORKSTATION REVENUE. Workstation revenue decreased 77% from $71,000 in
the second quarter of 1999 to $16,000 in the second quarter of 2000.
Brigham recognizes workstation revenue as industry participants in the
Company's seismic programs are charged an hourly rate for the work
performed by Brigham on its 3-D seismic interpretation workstations. The
decrease in the second quarter 2000 is primarily attributable to a
reduction in the volume of 3-D seismic interpretation activity billable to
industry participants as compared with the prior year period.
LEASE OPERATING EXPENSES. Lease operating expenses decreased 19% from
$619,000 for the second quarter of 1999 to $502,000 for the second quarter
of 2000 and, on a per unit of production basis, lease operating expenses
for the same periods decreased 21% from $0.40 per Mcfe to $0.32 per Mcfe.
The decrease in lease operating expenses was primarily due to a decrease in
the number of producing wells in the second quarter of 2000, as compared
with the same period in 1999, as a result of Brigham's June 1999 property
divestitures and the plugging and abandonment of certain uneconomic wells.
PRODUCTION TAXES. Production taxes increased 83% from $216,000 ($0.14
per Mcfe) for the second quarter of 1999 to $395,000 ($0.25 per Mcfe) for
the second quarter of 2000, primarily as a result of a 76% increase in the
average equivalent price received for natural gas and oil sales before the
effects of hedging gains and losses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 21% from $891,000 for the second quarter of 1999 to
$708,000 for the second quarter of 2000 primarily due to the reduction of
various administrative costs, including reduced employee payroll and
benefits expenses and lower office rent. On a per unit of production basis,
general and administrative expenses decreased from $0.58 per Mcfe for the
second quarter of 1999 to $0.45 per Mcfe for the second quarter of 2000.
DEPLETION OF NATURAL GAS AND OIL PROPERTIES. Depletion of natural gas
and oil properties increased 20% from $1.5 million ($0.98 per Mcfe) in the
second quarter of 1999 to $1.8 million ($1.15 per Mcfe) in the second
quarter of 2000. Of this net increase, $273,000 was due to an increase in
the depletion rate per unit of production and $33,000 was due to an
increase in production volumes. The increased depletion rate was
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principally the result of estimated additions of proved natural gas and oil
reserves at higher average capital costs during the second quarter of 2000
as compared with estimated amounts for the second quarter of 1999.
NET INTEREST EXPENSE. Net interest expense increased 28% from $2.4
million in the second quarter of 1999 to $3.0 million in the second quarter
of 2000. This increase was due to a higher average debt balance with a
higher average interest rate in the second quarter of 2000 compared with
the second quarter of 1999. The weighted average outstanding debt balance
increased from $104.1 million in the second quarter of 1999 to $112.5
million in the second quarter of 2000. The average effective annual
interest rate on borrowings outstanding during the second quarter of 1999
was 12.0% compared to 12.6% for the second quarter of 2000. Interest
expense in the second quarter of 2000 included $2 million of non-cash
charges, including (i) $1.5 million of interest expense related to the
Subordinated Notes that was paid through the issuance of additional
Subordinated Notes (or "paid-in-kind"), (ii) $298,000 for amortization of
deferred financing fees, and (iii) $237,000 for amortization of debt
discounts related to the issuance of the Subordinated Notes. See "Liquidity
and Capital Resources - Credit Facility; - Subordinated Notes".
OTHER EXPENSE. Other expense increased from $527,000 in the second
quarter of 1999 to $2.4 million in the second quarter of 2000. The Company
recognizes other income or expense primarily related to the changes in the
fair market values and the related cash flows of certain oil and natural
gas hedging contracts that do not qualify for hedge accounting treatment.
Other expense in the second quarter 2000 included (i) $1.9 million of
non-cash expenses related to the changes in the fair market values of these
hedging contracts during the period, and (ii) $471,000 of expenses related
to cash settlements incurred during the period pursuant to these hedging
contracts.
LOSS ON SALE OF NATURAL GAS AND OIL PROPERTIES. In June 1999, the
Company sold all of its interests in certain producing and non-producing
natural gas and oil properties for a total sales price of $17.1 million.
Due to the magnitude of the reserve volumes that were attributable to these
properties relative to the Company's remaining net reserve volumes, the
Company recognized a $12.2 million non-cash loss in the second quarter of
1999 to reflect the difference between the sales price received (after
adjustment for transaction costs) and the $28.9 million basis allocated to
the divested properties in accordance with the full-cost method of
accounting for oil and gas properties.
COMPARISON OF SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 2000
NATURAL GAS AND OIL SALES. Natural gas and oil sales increased 36% from
$6.7 million in the first six months of 1999 to $9.1 million in the first
six months of 2000. This increase was attributable to a 36% increase in the
average realized equivalent oil and natural gas sales price. Net natural
gas production volumes decreased 3% from 2,053 MMcf for the first six
months of 1999 to 1,987 MMcf for the first six months of 2000. Net natural
gas volumes for the first six months of 1999 included approximately 442
MMcf attributable to properties sold by Brigham in June 1999. Excluding
production attributable to these divested properties, net natural gas
volumes increased 23% in the first six months of 2000, compared to adjusted
volumes produced during the same period in 1999. This increase was
principally due to the completion of wells drilled over the past twelve
months and recompletion and workover projects performed on certain
producing wells. The average price received for natural gas decreased 6%
from $2.08 per Mcf in the first six months of 1999 to $1.96 per Mcf in the
first six months of 2000. Included in these realized prices were natural
gas hedging gains of $566,000 ($0.28 per Mcf) in the first six months of
1999, and natural gas hedging losses of $2.3 million ($1.13 per Mcf) in the
first six months of 2000. Net oil production volumes increased 5% from 178
MBbls in the first six months of 1999 to 188 MBbls in the first quarter of
2000. Excluding 22 MBbls of net oil production attributable to properties
divested in June 1999, net oil volumes increased 20% in the first six of
2000 as compared to the adjusted volumes produced during the same period in
1999. This increase was principally due to the completion of wells drilled
over the past twelve months and recompletion and workover projects
performed on certain producing wells. The average price received for oil
increased from $13.85 per Bbl in the first six months of 1999 to $27.89 per
Bbl in the first six months of 2000. Oil hedging losses reduced realized
average oil prices received in the first six months of 2000 by $2,000 ($.01
per Bbl). Brigham did not have any oil hedges in place during the first six
months of 1999.
WORKSTATION REVENUE. Workstation revenue decreased 70% from $161,000 in
the first six months of 1999 to $49,000 in the first six months of 2000.
Brigham recognizes workstation revenue as industry participants in the
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Company's seismic programs are charged an hourly rate for the work
performed by Brigham on its 3-D seismic interpretation workstations. The
decrease in the first six months of 2000 is primarily attributable to a
reduction in the volume of 3-D seismic interpretation activity billable to
industry participants as compared with the prior year period.
LEASE OPERATING EXPENSES. Lease operating expenses decreased 17% from
$1.2 million for the first six months of 1999 to $961,000 for the first six
months of 2000 and, on a per unit of production basis, lease operating
expenses for the same periods decreased 17% from $0.37 per Mcfe to $0.31
per Mcfe. The decrease in lease operating expenses was primarily due to a
decrease in the number of producing wells in the first six months of 2000,
as compared with the same period in 1999, as a result of Brigham's June
1999 property divestitures and the plugging and abandonment of certain
uneconomic wells.
PRODUCTION TAXES. Production taxes increased 82% from $385,000 ($0.12
per Mcfe) for the first six months of 1999 to $699,000 ($0.22 per Mcfe) for
the first six months of 2000, as a result of a 85% increase in the average
equivalent price received for natural gas and oil sales before the effects
of hedging gains and losses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses decreased 20% from $1.8 million for the first six months of 1999
to $1.5 million for the first six months of 2000 primarily due to the
reduction of various administrative costs, including reduced employee
payroll and benefits expenses, lower office rent and reduced equipment
rental and maintenance expenses. On a per unit of production basis, general
and administrative expenses decreased from $0.58 per Mcfe for the first six
months of 1999 to $0.47 per Mcfe for the first six months of 2000.
DEPLETION OF NATURAL GAS AND OIL PROPERTIES. Depletion of natural gas
and oil properties increased 25% from $2.9 million ($0.92 per Mcfe) in the
first six of 1999 to $3.6 million ($1.15 per Mcfe) in the first six months
of 2000. The increase was due to an increase in the depletion rate per unit
of production. The increased depletion rate was principally the result of
estimated additions of proved natural gas and oil reserves at higher
average capital costs during the first six months of 2000 as compared with
estimated amounts for the first six months of 1999.
NET INTEREST EXPENSE. Net interest expense increased 30% from $4.5
million in the first six months of 1999 to $5.8 million in the first six
months of 2000. This increase was due to a higher average debt balance with
a higher average interest rate in the first six months of 2000 compared
with the first six months of 1999. The weighted average outstanding debt
balance increased from $101.8 million in the first six months of 1999 to
$108.8 million in the first six months of 2000. The average effective
annual interest rate on borrowings outstanding during the first six months
of 1999 was 11.7% compared to 12.8% for the first six months of 2000.
Interest expense in the first six months of 2000 included $4.1 million of
non-cash charges, including (i) $3.0 million of interest expense related to
the Subordinated Notes that was paid through the issuance of additional
Subordinated Notes (or "paid-in-kind"), (ii) $689,000 for amortization of
deferred financing fees, and (iii) $417,000 for amortization of debt
discounts related to the issuance of the Subordinated Notes. See "Liquidity
and Capital Resources - Credit Facility; - Subordinated Notes".
OTHER EXPENSE. Other expense increased from $527,000 in the first six
months of 1999 to $3.0 million in the first six months of 2000. The Company
recognizes other income or expense primarily related to the changes in the
fair market values and the related cash flows of certain oil and natural
gas hedging contracts that do not qualify for hedge accounting treatment.
Other expense in the first six months of 2000 included (i) $2.4 million of
non-cash expenses related to the changes in the fair market values of these
hedging contracts during the period, and (ii) $620,000 of expenses related
to cash settlements incurred during the period pursuant to these hedging
contracts.
LOSS ON SALE OF NATURAL GAS AND OIL PROPERTIES. In June 1999, the
Company sold all of its interests in certain producing and non-producing
natural gas and oil properties for a total sales price of $17.1 million.
Due to the magnitude of the reserve volumes that were attributable to these
properties relative to the Company's remaining net reserve volumes, the
Company recognized a $12.2 million non-cash loss in the second quarter of
1999 to reflect the difference between the sales price received (after
adjustment for transaction costs) and the $28.9 million basis allocated to
the divested properties in accordance with the full-cost method of
accounting for oil and gas properties.
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LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of capital have been credit facility and
other debt borrowings, public and private equity financings, the sale of
interests in projects and properties and funds generated by operations. The
Company's primary capital requirements are 3-D seismic acquisition,
processing and interpretation costs, land acquisition costs and drilling
expenditures.
CREDIT FACILITY
In January 1998, the Company entered into a revolving credit agreement
(the "Credit Facility"), which provided for an initial borrowing
availability of $75 million. The Credit Facility was amended in March 1999
to reduce the borrowing availability, extend the date of borrowing base
redetermination, modify certain financial covenants, include certain
additional covenants that place significant restrictions on the Company's
ability to incur certain capital expenditures, and to increase the interest
rate on outstanding borrowings.
As a result of the completion of the majority of the Company's
strategic initiatives to improve its capital resources, including its June
1999 property divestitures and the application of the net sales proceeds to
reduce borrowings outstanding under the Credit Facility, the Company and
its senior lenders entered into an amendment to the Credit Facility in July
1999. This amendment provided the Company with borrowing availability of
$56 million principally to fund its planned drilling activities and
anticipated working capital requirements through the end of 1999. As
consideration for this amendment to the Credit Facility, in July 1999 the
Company issued to its senior lenders one million warrants to purchase the
Company's common stock at an exercise price of $2.25 per share. The
warrants have a seven-year term from the date of issuance and are
exercisable at the holders' option at any time. An estimated value of $1.2
million was attributed to these warrants by the Company and was recognized
as additional deferred loan fees that will be amortized and included in
interest expense over the remaining period to maturity of the Credit
Facility.
In February 2000, Brigham entered into an amended and restated Credit
Facility with its existing lenders and a new lender. This amended and
restated Credit Facility provides the Company with $70 million in borrowing
availability for a three-year term, an increase from the $56 million
previously available. If the Company exceeds certain asset value and
interest coverage tests in the third quarter of 2000, the total borrowing
availability under the Credit Facility will increase to $75 million. The
Company expects to meet these tests. In this amendment, the Company's
lenders indicated that the borrowing availability provided under the
amended Credit Facility exceeded that which would otherwise have been made
available under a more traditional conforming borrowing base calculation
based on the estimated value of the Company's then current net proved
reserves and cash flow.
The Credit Facility includes a provision whereby certain amounts held
by one lender, not to exceed $30 million, are convertible into shares of
Brigham common stock (the "Convertible Notes") to the extent total
borrowings under the Credit Facility exceed $45 million. The Credit
Facility provides that any outstanding Convertible Notes will be
convertible into shares of Brigham common stock in the following amounts:
(i) the first $10 million of borrowings is convertible at $3.90 per share,
(ii) the second $10 million is convertible at $6.00 per share and (iii) the
final $10 million is convertible at $8.00 per share. As of June 30, 2000,
the Company had $65 million in borrowings outstanding under the Credit
Facility, of which the Convertible Notes approximate $20 million.
The Convertible Notes could result in a beneficial conversion feature
based on the relationship between Brigham's stock price at the time of a
borrowing and the strike price of the relative portion of the Convertible
Notes. The value assigned to the beneficial conversion feature would be
recorded as a component of interest expense to the extent the applicable
Convertible Notes are immediately convertible. Due to the fact that the
strike price of the Convertible Notes at June 30, 2000 was in excess of the
market price of Brigham's common stock at each draw date since the
amendment of the Credit Facility, no beneficial conversion feature was
recorded.
If the Credit Facility is repaid at maturity or is prepaid prior to
maturity without payment of cash premiums, the warrants issued to the new
participant in the Credit Facility to purchase Brigham common stock become
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exercisable. Further, to the extent Brigham chooses to prepay any of the
Convertible Notes without the warrants becoming exercisable, and also
assuming the lender chooses not to convert to equity upon notice of such
prepayment, the Company will be required to a pay a premium above the face
value of the Convertible Notes to the lender. Such premium amounts would
range from 150% to 110%, depending upon the timing of the prepayment. Such
prepayment, however, would require prior approval of the original lenders
to the Credit Facility. In addition, certain financial covenants of the
Credit Facility were amended or added. In connection with this most recent
amendment, the Company reset the price of the warrants previously issued to
its existing senior lenders to purchase one million shares of Brigham
common stock from the then current exercise price of $2.25 per share to
$2.02 per share.
Principal outstanding under the Credit Facility is due at maturity on
December 31, 2002, with interest due monthly for base rate tranches or
periodically as LIBOR tranches mature. The annual interest rate for
borrowings under the Credit Facility is either the lender's base rate or
LIBOR plus 3.00%, at the Company's option. The Company's obligations under
the Credit Facility are secured by substantially all of the natural gas and
oil properties and other tangible assets of the Company. At August 11,
2000, the Company had $69 million in borrowings outstanding under the
Credit Facility, which currently bear interest at an annual rate of
approximately 9.6%.
The Credit Facility has certain financial covenants, including current
and interest coverage ratios, as defined. The Company and its lenders
effected the amendments to the Credit Facility in March 1999, July 1999 and
February 2000, in part to enable the Company to comply with certain
financial covenants of the Credit Facility, including the minimum current
ratio (as defined), minimum interest coverage ratio (as defined) and the
limitation on capital expenditures related to seismic and land activities.
Should the Company be unable to comply with certain of the financial or
other covenants, its senior lenders may be unwilling to waive compliance or
amend the covenants in the future. In such instance, the Company's
liquidity may be adversely affected, which could in turn have an adverse
impact on the Company's future financial position and results of
operations.
SUBORDINATED NOTES
In August 1998, the Company issued $50 million of debt and equity
securities to affiliates of Enron Corp. Securities issued by the Company in
connection with this financing transaction included: (i) $40 million of
Subordinated Notes, (ii) warrants to purchase one million shares of the
Company's common stock at a price of $10.45 per share (the "Subordinated
Note Warrants"), and (iii) 1,052,632 shares of the Company's common stock
at a price of $9.50 per share. The approximate $47.5 million in net
proceeds received by the Company from this financing transaction were used
to repay a portion of outstanding borrowings under its senior credit
facility, which at the time increased the Company's borrowing availability
under its credit facility to fund capital expenditures.
In March 1999, the Company and Chase Bank of Texas, National
Association, as trustee (the "Trustee") for the holders of the Subordinated
Notes, entered into an amendment to the indenture governing the
Subordinated Notes. This amendment provided the Company with the option to
pay interest due on the Subordinated Notes in kind, for any reason, through
the second quarter of 2000. In addition, certain financial and other
covenants were amended. The amendment also provided for a reduction in the
exercise price per share of the Subordinated Note Warrants from $10.45 per
share to $3.50 per share and extended the term of the Subordinated Note
Warrants from seven to ten years.
In February 2000, Brigham entered into another amendment to the terms
of the indenture governing the Subordinated Notes. In this amendment, the
holders of the Subordinated Notes waived the minimum consolidated interest
coverage ratio covenant through June 30, 2000 and adjusted subsequent
levels under this test. In addition, the amendment provides the Company
with an extension of its right to pay interest in kind through the issuance
of additional Subordinated Notes in lieu of cash through the third quarter
of 2000 and potentially through the fourth quarter of 2000 if certain
conditions are met. The Company currently does not expect to meet these
conditions and therefore will be obligated to make quarterly interest
payments on outstanding subordinated notes beginning in the fourth quarter
2000 (approximately $1.5 million due November 20, 2000) in cash.
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In exchange for granting the February 2000 amendments, the Company (i)
reset the price of the Subordinated Note Warrants from a then current
exercise price of $3.50 per share to $2.43 per share, and (ii) granted to
the holders of the Subordinated Notes a term overriding royalty interest
that provides for the limited right to receive 4%, or 3% if certain
conditions are met, of the Company's net production revenue to reduce any
outstanding Subordinated Notes issued as interest paid in-kind. Payments
made pursuant to the term overriding royalty interest will be recorded as a
reduction of the balance payable pursuant to the Subordinated Notes.
Principal outstanding under the Subordinated Notes is due at maturity
on August 20, 2003. Interest on the Subordinated Notes is payable quarterly
at rates that vary depending upon whether accrued interest is paid in cash
or "in kind" through the issuance of additional Subordinated Notes.
Interest is payable in cash at interest rates of 12%, 13% and 14% per annum
during years one through three, year four and year five, respectively, of
the term of the Subordinated Notes; provided, however, that the Company may
pay interest in kind for a cumulative total of seven quarterly interest
payments (potentially increasing to eight if certain conditions are met) at
interest rates of 13%, 14% and 15% per annum during years one through
three, year four and year five, respectively, of the term of the
Subordinated Notes. As of August 11, 2000, the Company had made a
cumulative total of six quarterly interest payments in kind and expects to
make the next quarterly interest payment (due August 20, 2000) in kind and
cash payments thereafter.
The Subordinated Notes (other than amounts payable pursuant to the term
overriding royalty interest) rank subordinate in right of payment to Senior
Indebtedness (as defined) and senior to all other financings (other than
any allowed capital leases and purchase money financings) of the Company.
The Subordinated Notes are secured by a second lien against substantially
all of the natural gas and oil properties and other tangible assets of the
Company. The Subordinated Notes may be prepaid at any time, in whole or in
part, without premium or penalty, provided that all partial prepayments
must be pro rata to the various holders of the Subordinated Notes. The
Subordinated Notes were issued pursuant to an indenture that contains
certain covenants that, among other things, limit the ability of the
Company and its subsidiaries to incur additional indebtedness, pay
dividends, make distributions, enter into certain sale and leaseback
transactions, enter into certain transactions with affiliates, dispose of
certain assets, incur liens, reborrow funds utilized to prepay the Senior
Indebtedness and engage in most types of mergers and consolidations.
The indenture governing the Subordinated Notes has certain financial
covenants, including current and interest coverage ratios, as defined. The
Company and the holders of the Subordinated Notes effected the March 1999
and February 2000 amendments to the indenture to enable the Company to
comply with certain financial covenants of the indenture, including the
minimum current ratio and the minimum interest coverage ratio, as defined.
Should the Company be unable to comply with certain of the financial
covenants, the holders of the Subordinated Notes may be unwilling to waive
compliance or amend the covenants in the future. In such instance, the
Company's liquidity may be adversely affected, which could in turn have an
adverse impact on the Company's future financial position and results of
operations.
At June 30, 2000 and August 11, 2000, the Company had $48.4 million,
respectively, principal amount of Subordinated Notes outstanding.
SALES OF INTERESTS IN PROJECTS AND NATURAL GAS AND OIL PROPERTIES
DUKE PROJECT FINANCING. In February 1999, the Company entered into a
project financing arrangement with Duke Energy Financial Services, Inc.
("Duke") to fund the continued exploration of five Anadarko Basin projects
covered by approximately 200 square miles of 3-D seismic data acquired in
1998. In this transaction, the Company conveyed 100% of its working
interest (land and seismic) in these project areas to a newly formed
limited liability company (the "Duke LLC") for total consideration of $10
million. The Company is the managing member of the Duke LLC with a 1%
interest, and Duke is the sole remaining member with a 99% interest.
Pursuant to the terms of the Duke LLC agreement, Brigham pays 100% of the
drilling and completion costs for all wells drilled by the Duke LLC within
the designated project areas in exchange for a 70% working interest in the
wells (and their allocable drilling and spacing units), with the remaining
30% working interest remaining in the Duke LLC, subject in each instance to
proportionate reduction by any ownership rights held by third parties. Upon
100% project payout, the Company has the right to back-in for 80% of the
Duke LLC's working interest in all of the then producing wells (and their
allocable drilling and spacing units) and a 94% working interest in any
wells (and their allocable drilling and spacing units) drilled after payout
within the
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designated project areas governed by the Duke LLC agreement, thereby
increasing the Company's effective working interest in the Duke LLC wells
from 70% to 94%. The Company believes this project financing arrangement to
be beneficial as it enabled Brigham to recoup substantially all of its
pre-seismic land and seismic data acquisition costs incurred in these
project areas and provided capital to fund the drilling of the first six
wells within these projects.
MID-1999 PROPERTY SALES. In June 1999, Brigham sold certain producing
and non-producing natural gas and oil properties located in its Anadarko
Basin province to two separate parties for a total of $17.1 million. The
divested properties were located in two fields operated by third parties -
the Chitwood Field in Grady County, Oklahoma (originally acquired by the
Company for $13.4 million in the Chitwood Acquisition in November 1997),
and the Red Deer Creek Field in Roberts County, Texas. Brigham's
independent reservoir engineers estimated net proved reserve volumes
attributable to the properties as of June 1, 1999 of approximately 36 Bcfe,
of which 33% were classified as proved developed producing reserves and 59%
were natural gas. The Company estimated that net production volumes from
the divested properties were 2.8 MMcfe per day at the time of the sales.
The Company used the proceeds from these transactions to reduce borrowings
under its credit facility, which contributed to provide the Company with $8
million in borrowing availability under its then existing credit facility
that was used to fund working capital needs and capital expenditures during
the second half of 1999. The effective date of each transaction was June
30, 1999.
EQUITY PLACEMENTS
Veritas Equity Issuances. On March 30, 1999, the Company entered into
an agreement with Veritas DGC Land, Inc. to exchange 1,002,865 shares of
newly issued Brigham common stock valued at $3.50 per share for
approximately $3.5 million of payment obligations due to Veritas in 1999
for certain seismic acquisition and processing services previously
performed. In addition, this agreement provided for the payment by Brigham
of up to $1 million in future seismic processing services to be performed
by Veritas in newly issued shares of Brigham common stock valued at $3.50
per share, in the event that the Company did not elect to pay for such
services in cash. The settlement of these future seismic processing
services was determined on a quarterly basis through September 30, 1999.
Pursuant to this agreement, Brigham issued a total of 1,211,580 shares of
common stock to Veritas to satisfy $4.2 million in aggregate payment
obligations due to Veritas for seismic acquisition and processing services
performed prior to 1999 and certain seismic processing services performed
during 1999.
PRIVATE EQUITY PLACEMENT. On February 22, 2000, Brigham entered into an
agreement to issue 2,195,122 shares of common stock and 731,707 warrants to
purchase common stock for total consideration of $4.5 million in a private
placement to a group of institutional investors led by affiliates of two
members of the Company's board of directors. The equity sale consisted of
units that included one share of common stock priced at $2.0525 per share
and one-third of a warrant to purchase Brigham common stock at an exercise
price of $2.5625 per share with a three-year term. Pricing of this private
equity placement was based on the average market price of Brigham common
stock during a twenty trading day period prior to issuance. Net proceeds
from this equity placement will be used to fund a portion of the Company's
planned 2000 capital expenditures and working capital obligations.
CASH FLOW ANALYSIS
CASH FLOWS FROM OPERATING ACTIVITIES. Cash flows used by operating
activities were $3.8 million in the first six months of 2000, which
consisted of $4.1 million in net operating cash flow (net cash used by
operating activities before changes in operating assets and liabilities)
and $7.9 million in cash flow used for working capital items. This compares
to cash flows provided by operating activities of $332,000 in the first six
months of 1999, which consisted of $2.7 million in net operating cash flow
and $2.4 million in cash flow used for working capital items.
CASH FLOWS FROM INVESTING ACTIVITIES. Cash flows used by investing
activities were $11.7 million in the first six months of 2000 as compared
with $11.2 million provided by investing activities in the first six months
of 1999. Capital expenditures declined $3.8 million to $11.7 million in the
first six months of 2000 compared to $15.5 million for the comparable
period in 1999. However, the Company realized net proceeds of $26.7 million
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in the first six months of 1999 from the sale of producing and
non-producing properties. No oil and gas properties were sold during the
first six months of 2000.
CASH FLOWS FROM FINANCING ACTIVITIES. Cash flows provided by financing
activities were $12.8 million in the first six months of 2000 as compared
with cash flows used by financing activities of $11.4 million in first six
months of 1999. This increase in cash flows provided by financing
activities resulted primarily from a $9 million increase in borrowings
under the Credit Facility and the February 2000 placement of common stock
and warrants that generated proceeds of $4.5 million before transaction
expenses. During the first six months of 1999, net borrowings under the
Credit Facility decreased by $10.8 million as a portion of outstanding
borrowings were repaid with proceeds received from the mid-1999 property
sales.
CAPITAL EXPENDITURES
Continuing its strategy implemented during 1999, Brigham intends to
focus substantially all of its efforts and available capital resources in
2000 to the drilling and monetization of its highest grade prospects within
its over 5,000 square mile inventory of 3-D seismic data. The Company's
2000 capital expenditure budget is $25 million, which includes
approximately $20 million for drilling projects and $5 million for
non-drilling activities (primarily acreage acquisition and capitalized
overhead costs). Brigham's 2000 drilling program consists of a balanced
blend of exploration and development drilling projects with approximately
54% of budgeted drilling expenditures targeted for exploratory prospects,
28% for development locations and the remaining 18% for development
locations that are contingent upon drilling success during the year. In
addition, the Company's 2000 budgeted drilling expenditures have been
allocated approximately 75% to its Gulf Coast province and 25% to its
Anadarko Basin province, concentrated within trends where the Company has
experienced exploration success to date. The Company intends to fund the
majority of its budgeted capital expenditures through a combination of cash
flow from operations, available borrowings under its senior credit facility
and the proceeds from its February 2000 private equity placement.
Additionally, the Company may supplement its available capital resources
through corporate debt and/or equity financings and selective sales of
interests in non-producing assets, including interests in its 3-D seismic
projects and promoted interests in future drilling prospects or locations.
Due to the Company's active exploration and development activities,
Brigham has experienced and expects to continue to experience substantial
working capital requirements. Based on current conditions and expectations,
the Company believes that cash flow from operations and borrowings under
its senior credit facility are sufficient to finance approximately $20
million of its planned capital expenditures for 2000. Additional financing
is expected to be required to fund the estimated remaining $5 million of
the Company's 2000 capital expenditure budget and negative working capital
requirements. In the event additional financing is not available, the
Company will be required to curtail or delay a portion of its planned
activities.
OTHER MATTERS
HEDGING ACTIVITIES
The Company believes that hedging, although not free of risk, allows
the Company to reduce its exposure to natural gas and oil sales price
fluctuations and thereby to achieve more predictable cash flows. However,
hedging arrangements, when utilized, limit the benefit to the Company of
increases in the prices of the hedged commodity. Moreover, the Company's
hedging arrangements apply only to a portion of its production and provide
only partial price protection against declines in commodity prices. The
Company expects that the amount of its hedges will vary from time to time.
In 1998, Brigham began using natural gas swap arrangements in an
attempt to reduce its sensitivity to volatile commodity prices as its
production base became increasingly weighted toward natural gas. Pursuant
to these arrangements the Company exchanges a floating market price for a
fixed contract price. The Company makes payments when the floating price
exceeds the fixed price for a contract month and the Company receives
payments when the fixed price exceeds the floating price. Settlements of
these swaps are based on the difference between regional market index
prices for a contract month and the fixed contract price for the same
month. The Company accounts for substantially all of these transactions as
hedging activities and, accordingly, adjusts the price received for natural
gas and oil production during the period the hedged transactions occurred.
28
<PAGE>
In September 1999, Brigham sold call options on a portion of its future
oil and natural gas production. The Company applied the proceeds from the
sale of these call options to increase the effective fixed swap price on
its then existing natural gas hedging contracts during the months of
October 1999 through January 2000 by an average of $0.57 per MMBtu. For
accounting purposes, the improvement in the Company's fixed natural gas
swap price attributable to these transactions is not reflected in reported
revenues. Rather, it is reflected in (i) other income (expense) on the
income statement, and (ii) amortization of deferred loss on derivatives
instruments and market value adjustment for derivatives instruments on the
cash flow statement.
In March 2000, Brigham purchased put options on a portion of its future
oil and natural gas production. These transactions effectively converted a
portion of its existing call options into collars, thus providing a hedge
to future changes in oil and natural gas prices. Brigham also entered into
costless collars on additional future oil and natural gas production thus
providing further protection to the Company's exposure to potential oil and
natural gas price declines.
The following tables summarize the Company's outstanding natural gas and
oil hedging arrangements as of July 1, 2000:
<TABLE>
<CAPTION>
NATURAL GAS HEDGES 2000 2001 2002
----------------------- ---------------------- -----------------------
Average Average Average
Monthly Volumes Contract Volumes Contract Volumes Contract
Pricing Contract Hedged Price Hedged Price Hedged Price
Basis Term (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu) (MMBtu) ($/MMBtu)
----- ---- ------- --------- ------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Swaps:
Contract #1 ANR July 2000 - 920,000 $2.0650 600,000 $2.0650 -- --
Oklahoma April 2001
Contract #2 Houston July 2000 - 920,000 $2.1500 600,000 $2.1500 -- --
Ship April 2001
Channel
Contract #3 TETCO July 2000 - 920,000 $2.0575 600,000 $2.0575 -- --
South Texas April 2001
Fixed Price Cap ANR May 2001 - -- -- 2,450,000 $2.5498 1,810,000 $2.6326
Oklahoma June 2002
Fixed Price Floor ANR May 2001 - -- -- 765,000 $1.8000 -- --
Oklahoma December 2001
<CAPTION>
CRUDE OIL HEDGES 2000 2001 2002
--------------------- ------------------- --------------------
Average Average Average
Monthly Volumes Contract Volumes Contract Volumes Contract
Pricing Contract Hedged Price Hedged Price Hedged Price
Basis Term (Bbls) ($/Bbl) (Bbls) ($/Bbl) (Bbls) ($/Bbl)
----- ---- ------ ------- ------ ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed Price Cap NYMEX July 2000 - 110,400 $31.75 109,200 $26.15 -- --
December 2001
Fixed Price Floor NYMEX July 2000 - 110,400 $18.00 109,200 $17.36 -- --
December 2001
</TABLE>
29
<PAGE>
EFFECTS OF INFLATION AND CHANGES IN PRICES
The Company's results of operations and cash flows are affected by
changing oil and gas prices. If the price of oil and gas increases
(decreases), there could be a corresponding increase (decrease) in revenues
as well as the operating costs that the Company is required to bear for
operations. Inflation has had a minimal effect on the Company.
ENVIRONMENTAL AND OTHER REGULATORY MATTERS
The Company's business is subject to certain federal, state and local
laws and regulations relating to the exploration for and the development,
production and marketing of natural gas and oil, as well as environmental
and safety matters. Many of these laws and regulations have become more
stringent in recent years, often imposing greater liability on a larger
number of potentially responsible parties. Although the Company believes it
is in substantial compliance with all applicable laws and regulations, the
requirements imposed by laws and regulations are frequently changed and
subject to interpretation, and the Company is unable to predict the
ultimate cost of compliance with these requirements or their effect on its
operations. Any suspensions, terminations or inability to meet applicable
bonding requirements could materially adversely affect the Company's
financial condition and operations. Although significant expenditures may
be required to comply with governmental laws and regulations applicable to
the Company, compliance has not had a material adverse effect on the
earnings or competitive position of the Company. Future regulations may add
to the cost of, or significantly limit, drilling activity.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting
for Derivative Instruments and Hedging Activities." This Statement, as
amended in June 2000 by SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities - an Amendment of SFAS No. 133"
establishes accounting and reporting standards for derivative instruments
and for hedging activities. It requires enterprises to recognize all
derivatives as either assets or liabilities in the balance sheet and
measure those instruments at fair value. The requisite accounting for
changes in fair value of a derivative will depend on the intended use of
the derivative and the resulting designation. The Company must adopt SFAS
No. 133 and No 138, as amended by SFAS No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133", effective January 1, 2001. The Company is currently
assessing the impact adoption of this standard will have on its financial
statement presentation.
In March 2000, the Financial Accounting Standards Board issued
Interpretation No. 44 ("FIN 44") ACCOUNTING FOR CERTAIN TRANSACTIONS
INVOLVING STOCK COMPENSATION, AN INTERPRETATION OF APB OPINION NO. 25. FIN
44 clarifies the application of opinion No. 25 for (a) the definition of
employee for purposes of applying Opinion No. 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequences of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions cover specific events that
occur after either December 15, 1998, or January 12, 2000. The Company
believes that the impact of FIN 44 will not have a material effect on its
financial position or results of operations.
FORWARD LOOKING INFORMATION
Brigham or its representatives may make forward looking statements,
oral or written, including statements in this report, press releases and
filings with the SEC, regarding estimated future net revenues from oil and
natural gas reserves and the present value thereof, planned capital
expenditures (including the amount and nature thereof), increases in oil
and gas production, the number of wells the Company anticipates drilling
through 2000 and the Company's financial position, business strategy and
other plans and objectives for future operations. Although the Company
believes that the expectations reflected in these forward looking
statements are reasonable, there can be no assurance that the actual
results or developments anticipated by the Company will be realized or,
even if substantially realized, that they will have the expected effects on
its business or operations. Among the factors that could cause actual
results to differ materially from the Company's expectations are general
economic conditions, inherent uncertainties in interpreting engineering
data, operating hazards, delays or cancellations of drilling operations for
a variety of reasons, competition, fluctuations in oil and gas prices,
availability of sufficient capital resources to the Company and its project
participants, government regulations and other factors detailed herein and
in the Company's 1999 Form 10-K report and other SEC filings. All
subsequent oral and written forward looking statements attributable to the
Company or persons acting on its behalf are expressly qualified in their
entirety by these factors. The Company assumes no obligation to update any
of these statements.
30
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In Part II, Item 7A of Brigham's Form 10-K report for the year ended
December 31, 1999 (see page 41 of Brigham's 1999 Form 10-K), Brigham
provided a discussion of its market risk. There were no material changes
during the second quarter of 2000 in Brigham's exposures to loss from
possible future changes in the prices of oil and natural gas or in interest
rates, other than those described in Brigham's 1999 Form 10-K report.
31
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27 Financial Data Schedule
(b) Reports on Form 8-K:
The Company filed a report on Form 8-K on April 24, 2000, to report the
announcements on April 17, 2000, that (i) it had drilled, tested and was
completing a Springer channel discovery well in its Anadarko Basin core
province and (ii) it provided an update on its development drilling
activity at the Home Run Field in its Gulf Coast core province. The Form
8-K included copies of the Company's press release that provided these
announcements.
The Company filed a report on Form 8-K on May 26, 2000, to report the
announcements (i) on May 11, 2000, of its quarterly overview of operational
activity for the three months ended March 31, 2000, and (ii) on May 15,
2000, of its financial results for the quarter ended March 31, 2000. The
Form 8-K included copies of the Company's press releases that provided
these announcements.
The Company filed a report on Form 8-K on July 5, 2000, to report the
announcements on June 19, 2000, that (i) it had completed and brought on
production a Lower Frio bright spot discovery well in its Southwest Danbury
Project in Brazoria, County, Texas, and (ii) it provided an update
regarding its 2000 drilling program and its daily production volumes. The
Form 8-K included copies of the Company's press release that provided these
announcements.
32
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized on August 11, 2000.
BRIGHAM EXPLORATION COMPANY
By: /s/ BEN M. BRIGHAM
-----------------------------
Ben M. Brigham
Chief Executive Officer, President and
Chairman of the Board
By: /s/ CURTIS F. HARRELL
-----------------------------
Curtis F. Harrell
Chief Financial Officer
33
<PAGE>
INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
--
27 Financial Data Schedule
